Fitch Affirms Mongolia's XacBank at 'B', Outlook Negative

(The following statement was released by the rating agency) HONG KONG, December 16 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Mongolia-based XacBank LLC at 'B'. The Outlook remains Negative. The Viability Rating (VR) was affirmed at 'b' and the Support Rating Floor (SRF) affirmed at 'B-'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS, VRS AND SENIOR DEBT The VR-driven IDR of the bank captures the weakening operating environment in Mongolia. This contributed to a spike in impaired loans in 2014 following the bank's shift towards SME lending, which now account for more than half of its loans, from microfinance operations. Management has been tightening its lending policies and Fitch believes that measures, such as limiting loan growth, reducing foreign currency lending and higher provisioning, could help the bank to maintain the financial characteristics associated with the current rating level. Adherence to its significantly lower growth target, possibly at the expense of market share, should enable the bank to maintain adequate capitalisation; XacBank's Fitch core capital ratio stood at 10.7% at 1H14. The ratings also capture the bank's satisfactory deposit franchise and stable access to foreign-currency funding from multinational and bilateral institutions. Diversified ownership and involvement of international shareholders in the bank's management underpin a reasonable degree of corporate governance. XacBank's Outlook remains Negative as Fitch considers it possible that XacBank's loan quality will continue to worsen as the weakening local currency lowers the capacity of borrowers to repay their foreign-currency loans. RATING SENSITIVITIES - IDRS, VRS AND SENIOR DEBT Fitch would downgrade XacBank's ratings if the bank were to increase its risk appetite, if its tightened risk management was insufficient to contain further material loan deterioration or if the bank was not able to quickly react to tougher operating conditions. Positive rating actions could derive from improving operating conditions, including a favourable resolution to a dispute between Rio Tinto and the government over the Oyu Tolgoi copper mining project and successful gradual removal of government stimulus measures. Less reliance on external parties to fund growth would be another consideration. KEY RATING DRIVERS AND RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating (SR) and SRF of the bank reflect Fitch's view that sovereign support, although possible, cannot be relied upon. Although Fitch believes the government is willing to support systemically important banks, its ability to do so remains limited. The SR and SRF are sensitive to changes in the authorities' ability and willingness to provide support. An upgrade of Mongolia's sovereign rating (B+/Negative) could result in a higher SRF while a downgrade may not necessarily trigger a change as the existing SR and SRF already indicate poor prospects for timely support. The rating actions are as follows: XacBank Long-Term Foreign Currency IDR affirmed at 'B'; Outlook Negative Short-Term Foreign Currency IDR affirmed at 'B' Long-Term Local Currency IDR affirmed at 'B'; Outlook Negative Viability Rating affirmed at 'b' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome. Contact: Primary Analyst Ivan Lin Associate Director +852 2263 9984 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Sabine Bauer Senior Director +852 2263 9966 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.